It is not unusual for prices to change on sites like Amazon, Expedia, and Priceline several times a day. But managers are struggling to understand these tactics. How often should companies really change their prices?
For any enterprise, the biggest constraint in changing prices is the “menu cost.” Historically, price changes were expensive and time-consuming, says HBR. Price lists had to be recalculated, typed up, and mailed to distributors and customers; new catalogs, labels, and signs had to be printed and press releases drafted. This forced companies to maintain prices. Throughout the 2000s, even as the internet continued to grow, prices remained the same for months at a time.
Over the past few years, however, technology has drastically shifted the economics of price changes. Pricing optimisation software helps companies link cost, customer, and sales-performance data and dynamic pricing methods allow firms to take account of market factors, competitor actions, and customer responses.
Menu costs have fallen dramatically. In industry after industry, this puts pressure on managers to change prices frequently. The popularity of short-lived price promotions, flash sales, and daily deals has further destabilised prices. But the trend is most pronounced among digital businesses, where price-change costs are virtually zero.
Many marketers see frequent price changes as a way of keeping customers on the hook and luring them back to their store or sites. Constant price shifts seem to be a good way to offer discounts selectively and protect margins.
But for a lot of consumers, fluctuating prices are merely confusing, frustrating, and annoying. Changes stop customers in their tracks.
Price changes often make the buying decision infinitely more complex. Customers no longer have clear reference prices, so they don’t know when to pull the trigger. Research shows that when decisions become complex, many people delay making decisions or back out of them altogether. For example, when a price moves around on an hourly basis, the best option for many consumers is to simply tune out and postpone the purchase.
Another insidious consequence is that constant price changes shift the customer’s attention away from the product’s features to its price. Humans are hardwired to pay attention to stimuli that change and ignore those that remain stable. So when prices fluctuate constantly (and other features don’t), customers naturally turn their attention away from hedonic and experiential aspects of the product — the very factors that make a strong brand and allow the company to enjoy a price premium — and focus on price. Even products that used to be differentiated are seen as commodities. Nowhere is this phenomenon more evident than in furniture, where incessant sales have commoditized an entire category.
Frequent price changes are also perhaps the single biggest instigator of price wars. Most price changes, especially those that are publicised by companies, tend to be decreases. And when competitors see that a price is cut, they feel compelled to respond. Many airlines and supermarkets have fallen into this trap, ending up in bruising price wars as they match each others’ cuts and get caught in fast-moving downward price spirals.
There are legitimate reasons to change prices, of course. A company may want to get rid of its remaining inventory and introduce new versions of its products. Companies like Apple, Sony, Dell, and LG have to do this. And in nondigital businesses, many products are seasonal: It makes sense to mark down sweaters in April and linen suits in October, for example. Other valid reasons for changing prices include rising raw material or labor costs, encouraging customers to try something new, and rewarding loyal customers.
But customer reactions to cavalier pricing actions may make quick fluctuations unproductive at best, and inflict lasting damage to a company’s bottom-line at worst. Prices should be changed only as often as the enterprise’s tactical objectives and overarching goals dictate.